Platt Perspective on Business and Technology

Developing a profit center sweet spot – offering extra added value

Posted in strategy and planning by Timothy Platt on June 8, 2011

Car and truck rental businesses make a profit from the rental agreements that their customers enter into and for individual vehicle rentals and for corporate account and fleet rentals. That is their primary business. But they also derive significant business revenue from offering supplemental insurance coverage on the side to reduce customer risk in the event of loss or damage. This is a collateral, supporting side-business that customers see as providing them with added value, but it is also a very significant source of extra profits for the rental businesses themselves.

Most restaurants have a primary business in providing prepared food in a setting that would prompt customers to pay premium prices. Bar services constitute a side-business to this that adds extra value as far as the customer is concerned. Many people like to have a glass of wine or beer, or a mixed drink with their meal. But with the cost of a drink that customers pay and expect to pay, as measured against the cost of the materials that go into it when purchased wholesale by the case and multiple case, the markup and profit can run to many hundreds of percentage points over the cost of the raw materials involved. On a profit margin over costs basis a restaurant’s bar can bring in a lot more for the business than its food sales.

Many businesses offer loss-leaders – products or services provided to the customer at break-even or loss prices, as marketing resources for bringing more customers in – where they will fill up their carts with full prices products and services too. There is a lot to say about that business model, and about how to deploy and optimize it. But here I write of something quite different – incorporating in a side business that both draws in customers in the manner of loss-leaders, but that also generates significant profits in and of itself, and sometimes at a much higher rate as a percentage of initial investment than the main product or service lines offered.

I write a lot of my postings with an intention of provoking thought. I write this one as a challenge. Think through your business and what you offer. Look for opportunities to more fully meet your customers’ needs and desires where adding in collateral or supplemental services would add significant value for them. What could you add in that would fit a loss-leader model? Set that list aside for now. More importantly for this discussion, what could you add in that would connect with and support your core business, that like supplemental vehicle insurance or a restaurant’s full bar service would also generate significant profits?

Car dealerships sell cars and trucks, and also in most cases offer service center support, and both for services provided under sales warrantee, and beyond. And not only does this bring in revenue – from the vehicle manufacturer for warrantee-covered service and from the service center customer, it also significantly correlates with increased rates for repeat vehicle purchase business.

Think outside of the usual patterns your competitors follow. If you have a hardware or home goods store, would it make sense to offer repair, remodeling and renovation services, serving, for example as a middleman agency in helping your customers find contractors who meet you seal of approval standards? This could potentially increase your business from customers not fully prepared to do it themselves. This would also provide contractors incentive to do business with you as they purchase tools and supplies for their ongoing businesses in general. And serving as a broker in bringing customers and contractors together can potentially involve fees too, directly generating new profit streams.

In effect what I am writing about here is an approach to creating a viable, profitable unique value proposition by adding cost-effective reasons for your potential customers to select you from among their choices in the marketplace.

• When an added side business is expected and common practice for your competition in your marketplace, you have to do it too, to stay even and competitive. Think bar service at restaurants as a working example there.
• If you can find novel and unexpected options and opportunities that your customers can and will want but that your competition does not satisfy, you open up new market opportunities. And if you can develop a significantly novel and consumer valued innovation as a collateral and supporting side business you have found a way to create blue ocean marketplace opportunity for your business as a whole.

And here, explicitly is my challenge. What can you do now, to enrich your customer’s experience and that will generate new revenue and profit streams for you in the process? Be creative, and think this through from the perspective of your customers and what they would want and value. Look to options and opportunities that are emerging as possibilities and that your competitors are not considering. Then cull out the ones that you cannot cost-effectively and profitably coordinate with and integrate into your core business model as supporting it. And try adding in what looks to be the best of what is left on your list.

You can find this and related postings in Business Strategy and Operations.

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